April 2: Anyone who thinks stock market sentiment is excessive today should speak to the American people. According to a Gallup poll in the first quarter, half of all Americans think putting money into the stock market is a bad idea.

In the 1999-2000 era, 67% of Americans thought putting money into the stock market was a great idea. Only 28% thought it was foolish. Fast-forward to today—more Americans think putting money into the stock market is a bad idea (50%) than think it’s a good idea (46%). We might be tempted to call this irrational nonexuberance in light of the performance of the market over the past five years.

When we think of important market tops, we think of widespread euphoria, absurd valuations, and even the dumbest ideas having endless venture-capital dollars thrown at them. There is little euphoria today for the overall market, as this survey makes clear. Valuations are only mildly elevated relative to history. Profitable companies like King Digital Entertainment, the recently public makers of the videogame Candy Crush, have seen their IPOs tank—and this despite the massive amount of revenue their biggest game brings in. Candy Crush is coming up on a billion dollars in revenue.

That’s the sort of metric the Pets.com sock puppet from 1999 could only dream about.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Barron’s Unsentimental Investors”

Possibility 1: Kahneman’s experiments showed that the loss aversion is prevalent in most people. Let’s put that in contemporary context: a small “investor” accumulates $20k over, say, 5-10 years. He/she doesn’t take vacations, he/she drives 12-year old car, etc. In a word, he/she delays gratification. And then… this:http://www.youtube.com/watch?v=-DT7bX-B1Mg
Repeat 2X (2000 and 2008) What do you think this has done to the risk aversion among the public? How many times do you expect people to fall for the same trick?

Possibility 2: the former bag-holders finally learned from the greatest investment minds that, for instance, the returns over next 7 years will likely be negative (Grantham), that one can make more money by doing nothing (Livermore) and in general the public learned to buy low, sell high and NOT buy high hoping to find even greedier speculator? (admittedly an unlikely possibility)

Possibility 3: In the 1999-2000 era, at least 67% of the population had extra $$ to invest. Since 2000 the real income for the bottom 80% (perhaps even 90%) went south, making investing in stocks a mathematical impossibility for a lot more people. (imho, BINGO!)

So, the degenerate gamblers (aka unreformed brokers, sell side, CNBC and everyone who appears on CNBC) cannot understand why the ultimate bag-holders (a.k.a. retail investors) keep rejecting the bait, even after 30% across the board market gains. First, the “brokers” get fired for “under-performing” the averages and they cannot understand how the rest of us can stay out of the market in 2013! (answer: we don’t get fired for under-performance.) Second, this is OUR money, unlike Walls Street’s OTM, so it’s kind-of “more valuable” to us than it is to them. And third, most of us are not degenerate gamblers like most of The Street.

Two things that The Street has been waiting for since 2010 (while loading up on risk) – CAPEX and bagholders joining the buying panic – still are not happening, even as The Street has been pulling out every trick in the book to get the sheep to take their place for yet another fleecing. The problem is that many sheep are permanently scarred by 2000 and 2008, and others simply have nothing to give. If massive CAPEX growth is not happening soon, we just might have a third market crash in 15 years!

If you are waiting for the “next leg” of the market to be powered by the “small bagholders”, I think you will be disappointed. And if there is no other source of cash to fuel the melt-up, you will be disappointed even more.

P.S. growth in CAPEX (if it happens) and hiring will lower profit margins and EPS and raise already “slightly elevated” P/E. The market and the CEOs that have wealth tied in stock options don’t think long-term, it’s a fact. What will the reduced (at least in the short term) earning do to the stock market? Your guess is as good as mine.

You are comparing only today to one data point. Usually this is a not the best way. Also considering that the data point in question was the most exuberant of recent history this may not be a good single data point as it is not a representative of the whole.

Here are some more historical data points:

Investors are buying stocks. According to the data from Investment Company Institute, in January, investors purchased $23.9 billion worth of long-term stock mutual funds. This was the highest amount since January of 2013. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed March 7, 2014.)

As key stock indices are hitting their all-time highs, investor sentiment is turning bullish. According to the American Association of Individual Investors’ (AAII) Investor Sentiment Survey — which measures investors’ sentiment, be it bullish, bearish, or neutral — in the latest survey, which was on March 5, more than 40% of investors were bullish on the key stock indices. Bears were only 26.6%. (Source: “AAII Investor Sentiment Survey,” American Association of Individual Investors web site, last accessed March 7, 2014.)

US equity market sentiment, according to the smoothing average from the Investor Intelligence survey data, is currently at one of the highest levels ever in its multi decade history. In his recent March newsletter Barry Bannister warns that, at the beginning of the year sentiment was as bullish as immediately before the 1987 stock market crash. The chart above also shows that a contrarian sell signal is still in play.

Perhaps those saying “it’s never different this time” need to go a little further back in their history. They like to quote “it’s never different this time” to make the case that stocks are expensive or a bubble.

But it always seems to escape them that “it’s never different this time” could be holding true for another phenomenon – fiat currencies always go to zero. Central banks monetizing the Federal deficit always leads to currency depreciation. Nations that must maintain massive military empires just to keep the status quo always go bankrupt…

In that context of “it’s never different this time”, what stocks are doing makes perfect sense. They are priced in dollars. The Fed has been telling people for over 5 years now that cash is trash. It can be created billions at a time with a few key strokes.

It’s never different this time. When you kick a banking crisis up to the sovereign level, you end up with a sovereign crisis. when the sovereign crisis begins to get bad, the price of stuff in local currency doesn’t drop. It rises. Especially equities

When talking about retail investors we should always keep in mind that, at least in terms of how much is owned by whom, they largely aren’t the middle class…

The top 1% of households own 35% of stocks.
The next 9% 45.8%
The remaining 19.2% is held by the rest of American households. And, you can break that number down to 16.7% of all stock held by the next 30%, with 2.5% being held by the bottom 60%.

So, the real question should be, how do the the wealthiest 10% of households feel about investing in equities. Their sentiments, and pretty much only theirs, matter.
By and bye, it takes roughly a million in net household assets to be part of that group – including real estate, stocks, bonds, collections etc.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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